Practice Management

Measuring Your Law Firm's Billing Cycle

By Brian J. Ritchey

One of the observations in the 2007 Law Firm Economic Survey by LexisNexis and a focus of the 2008 Survey (in progress) relates to cash flow.  According to the 2007 Survey, all firms had a slow billing cycle.  On average it took firms 170 days from providing a service to collecting payment on it.  In non-service industries that would be a recipe for bankruptcy.   Law firms enjoy high margins, so once the firm initially weathers the 80 or so days before the cash starts coming in, it can survive the slow cycle.  Unless the cycle stops.

How will you know when clients stop paying?  How long do you have until your cash flow reduces to a trickle?  Measuring your billing cycle times is critical in answering these questions. 

Long billing cycles hide what may be slowly killing your firm - inefficiencies, declining business, etc.  If you aren't measuring your performance in converting work to cash, you may not know that your firm is in a crisis for several months, wasting valuable time to act.

Below is an example chart that shows how you can measure the billing cycle by just tracking your unbilled fees, billed fees, and collected fees. 

 To determine unbilled fees, take your work in process that is currently unbilled and not subject to mark-down (to the extent known) for the prior "rolling" 12 months.  Do the same for fees billed and fees collected.  From that you can determine your average days to bill, days to pay and average AR days fees outstanding.  Lowering any of these numbers will increase cash flow and provide additional liquidity to the firm. 

The above takes a look at the billing cycle from the firm perspective.   You can also do this analysis on a timekeeper or practice area.  Tools such as Juris' Active Information can not only track your billing cycle but can also drill down into the "why", exposing inefficiencies that are hampering your ability to maintain liquidity and giving you an opportunity to act to increase cash flow before it slows.

Click on the graphic above to download a spreadsheet to use with your firm's numbers.  You must be a registered user to download content.

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Full post as published by More Partner Income on April 25, 2008 (boomark / email).